Top economist makes case for steady land prices, despite ag downturn

February 26, 2016 at 10:06 am

Pressure on US land values may stay constrained despite the losses many growers face, one of the country’s top ag economists said, noting the extent of farmers’ reserves left over from more prosperous times.

Robert Johansson, chief economist at the US Department of Agriculture, flagged the extent to which land prices had soared during more prosperous times for agriculture.

However, he did not suggest that the sharp decline in agricultural income of late would prompt an equally rapid reversal.

Rental measure

Certainly, recent data from the Federal Reserve on land values in key Plains and Midwest states “show that land values might have hit a plateau”, Dr Johansson told the USDA’s Outlook forum.

“In general, farmland values in the region have been weakening lately.”

However, judged by cash rents – and calculating a value from capitalising this revenue stream – current land prices “could make sense in some regions.

“The present value of the income stream remains above the average land value in the Corn Belt,”

Running at a loss

This was the case even if making an allowance for higher interest rates, or an easing in rents – which appears possible, given the weaker profitability prospects farmers face.

“There will be pressure to renegotiate those cash rents lower,” Dr Johansson said, calculating that farmers basis in Illinois could expect to make $165.45 an acre from corn and $175.00 an acre from soybeans after costs such as machinery, insurance and inputs.

That is not enough to cover costs of renting land, put at $228 per acre, he said, citing data from the University of Illinois.

However, “adjustments” to rental values “will likely be slow”, he said, noting the financial cushion that farmers had built up from the sector’s boom period.

“High net farm income levels from several years ago helped US producers strengthen their financial base.”